Transaction Costs and Market Institutions: Grain Brokers in Ethiopia

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trading networks, along with a rich set of instruments, enabled the analysis of the
effects of these costs on trading arrangements made by individual traders.
An empirical model linking individual traders’ transaction costs and use of
brokers was constructed to test whether traders were individually rational in
choosing to use brokers in order to minimize their transaction costs of search. In
testing this model, sample selectivity bias was avoided through the inclusion of
non-users of brokerage and simultaneity bias, due to the fact that the location of
trade is linked to the choice of brokerage, was avoided by using predicted shares
of distant transactions from a regression of distant shares against traders’
transaction costs, social capital, and market-level effects.
The results reveal that, despite traders’ heterogeneity, their individual behavior
vis-à-vis the presence of brokers is economically efficient. This finding suggests
that traders operating in newly liberalized markets are “efficient-but-poor,” to
paraphrase Schultz’ classic hypothesis, in that they operate within highly
constrained, risky, and costly marketing environments. Thus, while traders
exhibit optimizing behavior, they are nonetheless clearly acting in a second-best
world. The results imply that the function of brokers is critical in reducing
transaction costs and enhancing the performance of the Ethiopian grain market.
In addressing the key question of how best to strengthen the performance of the
private sector in the post-market reform era, this study supports the view that